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Home Depot's Home Improvement
Following behind rival Lowe's (NYSE:LOW), Home Depot (NYSE:HD), the largest home improvement retailer in the U.S., reported good year-over-year quarterly results. For the second quarter of fiscal 2010, Home Depot delivered net earnings of $1.2 billion, or 72 cents per diluted share, compared with net earnings of $1.1 billion, or 66 cents per diluted share, in the same period of fiscal 2009. Sales for the second quarter totaled $19.4 billion, a 1.8% increase from the year ago quarter. Comparable store sales for the second quarter of fiscal 2010 were positive 1.7%.
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The Benefits of Scale
Home Depot continues to execute well on its strategy of improving operating efficiency. During the quarter, SG&A expenses remained flat, allowing the 1.8% increase in sales to lead to a nearly 10% increase in earnings per share. EPS was helped as well by a slight reduction in diluted shares outstanding. As the largest home improvement chain, with only Lowe's to consider as a serious competitor, Home Depot is demonstrating how the advantages of size have enabled the company to navigate one of the worst housing markets in history. By being the biggest, Home Depot can keep its prices very competitive while still managing to deliver a respectable bottom line.
Looking at corporate performance, one can't help but notice the quality figures coming out of the large dominant businesses in their respective industries. Farm equipment manufacturer Deere (NYSE:DE) this week delivered better than expected earnings figures with EPS up over 40%.
Looking Ahead
Looking out at the rest of 2010, Home Depot updated its fiscal 2010 guidance and now expects sales to be up approximately 2.6% for the year. The company expects diluted earnings per share from continuing operations as reported to increase by approximately 22.6% to $1.90 for the year. That's a very favorable outlook from Home Depot, yet its clearly that most of the profitability will come from efficiency improvements and not a sales increase. Lowe's was very cautious about the second half of 2010 as well. And despite the good numbers from Deere, Mr. Market wasn't impressed by the cautious future outlook. Even retailing giant Target's (NYSE:TGT) profit growth of 14% in the second quarter was bolstered by cost cuts that made up for a weaker than expected sales increase of 3.1%, respectively.
A New Paradigm
Doing more with less seems to be the name of the game today in the business world. For individual companies, greater efficiency is definitely a plus. On the other hand, it comes at the expense of increased unemployment which feeds back into the circle by reducing consumption. Investors should navigate the economy in the next several months with a very cautious outlook. (To learn more about retail based investments, see Analyzing Retail Stocks.)
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IN PICTURES: 20 Tools For Building Up Your Portfolio
The Benefits of Scale
Home Depot continues to execute well on its strategy of improving operating efficiency. During the quarter, SG&A expenses remained flat, allowing the 1.8% increase in sales to lead to a nearly 10% increase in earnings per share. EPS was helped as well by a slight reduction in diluted shares outstanding. As the largest home improvement chain, with only Lowe's to consider as a serious competitor, Home Depot is demonstrating how the advantages of size have enabled the company to navigate one of the worst housing markets in history. By being the biggest, Home Depot can keep its prices very competitive while still managing to deliver a respectable bottom line.
Looking Ahead
Looking out at the rest of 2010, Home Depot updated its fiscal 2010 guidance and now expects sales to be up approximately 2.6% for the year. The company expects diluted earnings per share from continuing operations as reported to increase by approximately 22.6% to $1.90 for the year. That's a very favorable outlook from Home Depot, yet its clearly that most of the profitability will come from efficiency improvements and not a sales increase. Lowe's was very cautious about the second half of 2010 as well. And despite the good numbers from Deere, Mr. Market wasn't impressed by the cautious future outlook. Even retailing giant Target's (NYSE:TGT) profit growth of 14% in the second quarter was bolstered by cost cuts that made up for a weaker than expected sales increase of 3.1%, respectively.
A New Paradigm
Doing more with less seems to be the name of the game today in the business world. For individual companies, greater efficiency is definitely a plus. On the other hand, it comes at the expense of increased unemployment which feeds back into the circle by reducing consumption. Investors should navigate the economy in the next several months with a very cautious outlook. (To learn more about retail based investments, see Analyzing Retail Stocks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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